Edited version of private advice

Authorisation Number: 1051877989815

Date of advice: 30 July 2021

Ruling

Subject: Capital gains tax

Question 1

Are you entitled to a full main residence exemption?

Answer

No.

Question 2

Are you entitled to a partial main residence exemption?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse purchased a vacant block.

The property is greater than XX hectares in size.

You had the intention to build a family home on the property.

You and your spouse established a residence on the property with a caravan until you were able to build.

You and your family started living on the property in the caravan approximately a year after it was purchased.

After living in the caravan on the property for a significant period, due to family circumstances you and your children had to move out.

The property has since been sold.

The caravan was sold with the property.

The property was not used to produce income.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 subsection 118-120(2)

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-145

Reasons for decision

Section 118-110 of the Income Tax Assessment Act 197 (ITAA 1997) provides that you can disregard a capital gain or capital loss made from a capital gains tax (CGT) event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, must not have been used to produce assessable income and is situated on land not exceeding 2 hectares.

For the purposes of the main residence exemption, a dwelling includes a unit of accommodation that is a caravan, and any land immediately under the unit of accommodation (section 118-115 of the ITAA 1997). However, subsection 118-120(2) of the ITAA 1997 specifies that the total of the land (including the land on which the dwelling is situated) must not exceed 2 hectares. Where the land exceeds 2 hectares, you will only be entitled to a partial exemption.

Establishing your main residence

Section 118-135 of the ITAA 1997 states if a dwelling becomes your main residence by the time it is first practicable for you to move into it after you acquired your ownership interest in it, the dwelling is treated as your main residence from when you acquired the interest until it actually became your main residence. The meaning of the expression 'the time it was first practicable' in section 118-135 of the ITAA 1997 should not be read down to mean the time it was first convenient (Re Chapman and FC of T 2008 ATC 10-029; 71 ATR 689).

If you do not move into the dwelling when it first becomes practicable to do so, the section does not apply to treat the dwelling as a main residence. This means that the dwelling will only be your main residence from the time you move in.

Continuing main residence status after dwelling ceases to be your main residence

In some cases, you can choose to have a dwelling treated as your main residence even though you no longer live in it (section 118-145 of the ITAA 1997). You can only make this choice for a dwelling that you have first occupied as your main residence.

If you do not use the dwelling to produce income, you can treat the dwelling as your main residence for an unlimited period after you cease living in it.

If you make this choice, you cannot treat any other dwelling as your main residence for CGT purposes during the period the choice is in effect.

Application to your circumstances

In your case, you disposed of the property that included your main residence. You satisfy the requirements to obtain the main residence exemption; however, the land exceeded 2 hectares. Accordingly, you are only entitled to a partial main residence exemption.

Additionally, there was a considerable delay between when you acquired the property and when you established it as your main residence. It is not considered that you moved into the property as soon as practicable after it was purchased. Therefore, you are not entitled to the main residence exemption for the period between when the property was purchased and when you established it as your main residence. As you did not use the property to produce income after you moved out, you can choose to continue to treat the property as your main residence until the date it was sold.

Also, as you co-owned the property, you are only subject to capital gains tax for your ownership share of the property.